…Failure would set back the cause of reform across sub-Saharan Africa.
One might scoff at the idea that Nigeria might be on the verge of turning around its economic fortunes. The country has been plunged into one crisis after another since the 1980s, when oil prices plummeted. But now sub-Saharan Africa’s largest economy is at a turning point. Over the past year or so, the Nigerian government has implemented major and politically difficult reforms.
Large-scale reform processes are never perfect, but they must succeed. Africa’s future depends on its success. An economic turnaround in this country, which has more poor people than almost any other country, would be a game-changer for market-oriented reforms across the continent. Consider the scale of reforms that have been implemented so far.
Nigeria currently uses a market-determined exchange rate, with a unified official and parallel exchange rate. Previously, the government was losing the equivalent of 38 cents for every dollar of government oil export revenue. This benefited some local elites who obtained cheap dollars at the government’s expense.
This unification also eliminated high implicit taxes on agricultural and industrial exports. Expensive and regressive gasoline subsidies are also being cut. This would help strengthen Nigeria’s historically unstable finances and restore the naira as a reliable currency. Achieving such far-reaching change is impossible without political commitment from the top. Since the subsidy cuts, petrol prices in Nigeria have soared fivefold, causing severe hardship to the entire society.
To boost confidence in the naira and anchor inflation expectations, the central bank has had to raise interest rates by 850 basis points over the past nine months. The central bank’s financing of the budget deficit has finally come to an end. But the hard part is just beginning. Nigeria needs to stay on course if it is to become the engine of growth in sub-Saharan Africa. While the past track record is not encouraging, and previous reforms have been rolled back by elites, policymakers will need to focus on three key areas in particular: First, we should prioritize growth in areas other than oil.
This requires a competitive exchange rate, which Nigeria is currently achieving. To protect the poor and remain competitive, central banks must maintain a focus on inflation. There is a need to resist the temptation of volatile short-term capital inflows that could sharply drive up the value of the naira and suppress non-oil growth in the process. And foreign exchange reserves should be rebuilt as a buffer against fluctuations in oil prices and exchange rates.
Second, Nigeria needs to help vulnerable households cope with still-high inflation. The government is rolling out a large-scale, targeted, temporary cash transfer program. We also need to establish cost-effective safety nets to protect the most vulnerable. The third and final priority is to establish an environment in which private enterprise can thrive. Nigeria’s need for employment is immense. Currently, less than 14 percent of working Nigerians enjoy a predictable, fixed wage. Over the next 10 years, the number of Nigerians in the labor force is expected to increase by more than 12 million people.
Creating the necessary number of quality jobs will depend on stimulating large-scale domestic and foreign private investment in non-oil sectors. The Nigerian government deserves the world’s support in this effort. Failure in Nigeria will not only undermine the prospects of yet another generation of young Nigerians, it will also set back the cause of reform across Africa. The country’s elites must build a political consensus to support these reforms because their long-term interests lie in a broadly prosperous and stable society. The international community should do everything in its power to support the government’s success.
*The author, Indermit Gill, is the World Bank’s chief economist and senior vice president for development economics.